ODC And Fixed Cost Contract: Pros And Cons Explained

Utilizing offshore development for projects is advised, commonly known as ODC. Despite its benefits, it also presents drawbacks, requiring caution in its implementation. Furthermore, numerous managers and developers may experience anxiety regarding overseas interactions, causing a lack of familiarity with its usage. Consequently, we aim to provide a comprehensive explanation of ODC, its advantages, and disadvantages, contrasting it with contractual agreements, outlining its specific workflow, and offering strategies to guarantee successful ODC project outcomes.

What is ODC?

ODC stands for “Offshore Development Center” and means “lab-type development”. ODC is a type of offshore development that entrusts all or part of the development work to an overseas development company.

Specifically, it means a Fixed Cost Contract in which a development team (= laboratory) dedicated to the client is built in-house, and the system is developed according to the (client’s) instructions for a certain period. Let us briefly describe its characteristics.

• All team engineers will be compensated based on the amount of work they complete, rather than the deliverables they produce.
• The quasi-delegation contract allows the ordering party to manage and instruct the development work without giving up control.
• The contract also allows for changes to be made to the specifications. If the contract period extends beyond the completion of development work, compensation will still be provided.

The contract period of ODC can be as short as 1 month and as long as 1 year or more. If you want to collaborate for a long time, you will have some mutual points with the IT outsourcing team, so if there is good compatibility, there are many cases where you will continue to do ODC with the same partner repeatedly, even after the contract ends.

In short, it will be easier to understand if you think of temporarily hiring a group of temporary engineers exclusively. In reality, Bridge SEs and Product Managers (PMs) are also team members, playing the role of contact with the client and coordinating the team.

We cannot terminate the contract before the schedule just because we have to complete all the development that we had signed. We will be paid based on the number of team members and hours worked within the specified period. Therefore, it is not cost-effective to request additional work if the labor force is not being used efficiently.

Advantages of ODCs

Next, let’s discuss the advantages and disadvantages of ODC.

The advantages are the following six points.

• Cost reduction
• No hiring or personnel training required
• Changeable specifications
• Speed ​​up development
• Accumulated know-how development
• Multiple projects that can be requested

Let’s take a closer look at each merit.

Read more: What is Offshore Development? How to Succeed in Offshore Development?

Cost Reduction

One of the biggest benefits of using ODC is the significant cost efficiency. Key ODC countries are Southeast Asian countries such as Vietnam, India, China, the Philippines, and Myanmar. Labor costs for IT engineers in these countries are significantly lower than those in Japan, the EU, or developed countries, which is on the rise.

For instance, the monthly labor cost in Japan can be as high as 6000 to 8000 USD. The cost is much lower in ODC countries, only ranging from 1500 to 4500 USD. This makes ODCs a cost-effective option. For example, hiring three engineers from Vietnam’s ODC would cost around 3000 USD per month, even if you can afford higher costs.

The monthly labor cost varies depending on the company, so this is just an estimate, but the difference in the amount is clear.

*(At ODC, in addition to engineers, there are product managers (PM) and BrSEs (Bridge Software Engineers) who act as bridges between the clients and engineers in IT outsourcing companies, but the monthly labor cost is about 1.2 to 1.6 times higher than that of engineers.

Moreover, engineers in ODC countries often have the same skillset and experience as domestic engineers. Therefore, it is possible to proceed with development at a low cost without sacrificing quality, which is a great advantage.

No Hiring or Personnel Training is Required

By using an ODC service, you can hire skilled engineers who are ready to work on your development projects just like your own employees. This is more efficient than hiring and training new engineers in-house. Developed countries are experiencing IT talent shortages, as a consequence, making it difficult to find suitable candidates for development work. However, with an ODC, you can avoid this issue and solve the problems of hiring and training new engineers.

Changeable Specifications

ODC is not focused on developing specific deliverables, but rather on securing a significant amount of work for a specific period based on human resources. This allows for flexibility in changing project specifications during development, which is occurring on a daily basis in actual development projects. Agile development, which emphasizes flexibility and allows for changes in requirements and restoration of man-hours, is becoming more popular than traditional waterfall development. ODC services are well-suited for this approach and can meet the needs of agile development projects.

Speed-up Development

ODC services, which allow for flexible specification changes, can help to reduce the development period and avoid major revisions. This, coupled with access to skilled engineers, can further increase development speed. Additionally, leveraging the time difference between countries through the use of the internet and cloud technology can lead to more efficient business promotion. Work can continue even after work hours have ended in the client’s country, allowing for faster progress. This can help to gain a competitive advantage and contribute to greater profits.

Accumulated Know-How Development

Another big advantage of using ODC is that you can accumulate know-how through in-house development. Companies with more experience in ODC have more excellent engineers. There is a lot to be learned by seeing their work up close. It can be an important resource for your company and an opportunity for human resource development.

Multiple Projects That Can Be Requested

ODC will give priority to engineers who are working on projects that they want to further develop, and they will accept multiple requests. If a contract period extends beyond the completion of a project, they are open to outsourcing another project.

ODC is especially suited for research and development fields that are complex and where specifications are likely to change. Relipa has been providing ODC, which caters to Japanese companies and has a team of skilled engineers who are proficient in Japanese and English. They offer full support for custom development projects and are highly regarded for their fast and efficient development processes, as well as their cost-effectiveness. If you are considering developing core systems, software, applications, or Web3-related projects such as blockchain and metaverse, do not hesitate to reach out to us.

Disadvantages of ODCs

Then there are the disadvantages of ODC. Particularly, the following six points.

• Responsibility for quality and delivery is not ensured
• Communication can be challenging
• Personnel selection requires careful consideration
• Cultural differences may cause difficulties
• Short-term development may not be suitable
• Labor costs may be incurred if the development period is extended

Responsibility for Quality and Delivery is Not Ensured

ODC is not a typical contract where a specific deliverable is developed and delivered. Instead, it is more of a request-based development process where a certain part of a project is developed as needed. This can sometimes lead to concerns about a lack of emphasis on quality assurance and adherence to delivery timelines. The extent of this issue can vary depending on the country, company, and engineer involved, and it cannot be said that it is a universal disadvantage in all cases. However, clients should be aware of this possibility and closely monitor how the development task is being managed.

Communication can be Challenging

If you can communicate in foreign languages like English, Chinese, or Japanese, there is no problem, but if the contractor does not have employees who can speak those languages, or if they only understand a few words, the work may not proceed smoothly. In ODC, the BrSE in particular is the key to development. If the BrSE can clearly understand the specifications and fully convey them to the engineers, the possibility of obtaining the expected results will be Personnel selection requires careful consideration

In many cases, ODC will proceed with development work together while having close exchanges for several months to a year. Therefore, the relationship with the client is very important. Even if you are an excellent engineer, if you do not listen to the requests of the ordering party and push your own way, there is a risk that the development work will come to a standstill in the middle. Or, you should not proceed with development without any report and have to make major revisions later. Especially in the case of ODC, there is a high possibility that the specifications will be changed frequently, so it can be said that the success or failure of the project greatly depends on whether or not there is a willingness to flexibly understand the intentions of the client. In that sense, it would be very reassuring if we could select people who are gentle and honest, including bridge SEs, who do not show off too much pride, and have received good reviews from clients for their past work performance.

For that reason, it is a good idea to have an interview in advance, receive an introduction from a trusted acquaintance, and take measures so that you will not regret it after signing the contract.

Cultural Differences May Cause Difficulties

Even within the same Asian region, there are big differences in culture and customs between Japan and ODC countries. For example, Indonesia has a large Muslim population, and it is customary to pray five times a day. Especially around noon and 3:00 p.m., it is not uncommon for people to prioritize prayer even when they are working.

There are also customs to celebrate the New Year at different times, such as the Spring Festival in China. In Vietnam, the Lunar New Year holiday, called “Tet”, is the most exciting and important event of the year, and it is common sense for companies to take a week or more off. The difference in time zone and culture can be a factor to be considered when working with an IT outsourcing team.

Short-term Development May not be Suitable

ODC will proceed with the execution by forming a team of different developers. Therefore, it usually takes some time to get used to it. There may be language barriers, workflow, the content and timing of reports, etc., which may be confusing at first. Therefore, if the ODC ends in less than a month, the team may not be fully formed before the end, and there is a possibility that it will not make much sense to cooperate. A contract of at least 3 months or longer would be more appropriate for ODC.

Labor Costs May be Incurred If the Development Period is Extended

It is not good if the contract period is too short, but if it is too long for the development content, there is a possibility that the period will be over. In the case of ODC, even if the originally planned development is completed, you must continue to pay remuneration to the engineers until the contract period ends.

For example, let’s assume a case where the unit price per person per month is 300,000 yen and there are 3 engineers. If the contract period is over one month, the cost will be 900,000 yen even if nothing is done. Therefore, if you do not anticipate such a case before signing a contract and devise ways to use up the workload of team members, such as requesting other development work, the cost-effectiveness will decrease.

Difference Between ODC and Fixed Cost Contract

In offshore development, there are “Fixed Cost Contract” and ODC. Fixed Cost Contract is a contract type that outsources the entire development work to the other company. The principle is to deliver the finished product of the decided deliverable on time. The table below shows the differences between ODC and Fixed Cost Contract.

If the project specifications are well-defined and unchanging, it is advisable to opt for a Fixed Cost Contract. This type of contract is suitable even for one-time projects that require completion. However, if the project specifications are unclear and may change during development, then ODC is a better option. ODC is also recommended for continuous development projects where the same team can work on the project repeatedly and build a trusting relationship with each other.

At Relipa, we offer both ODC and Fixed Cost Contract options and will tailor our services to your specific development needs. Our team includes not only BrSEs but also translators and interpreters who are proficient in Japanese and English. Our staff are well-versed in Japanese business customs and will provide full support for your offshore development project. Please do not hesitate to contact us to discuss your development needs.

ODC and Outsourcing

Regardless of the industry, there are many examples of using outsourcing (outsourcing) in system development. Outsourcing is basically outsourcing all the development work. Work management, work instructions, and work results are managed by the contracted company. In the sense that you are responsible for delivering the deliverables, it can be said to be similar to an offshore contract development contract.

On the other hand, in the case of ODC, it is a quasi-delegation contract in which the ordering party takes the initiative without leaving everything to the other company. Grasp the progress, manage the work status of the entire team in detail, and if you see a situation that is different from the intention, you will be instructed to correct it immediately. In that sense, it can be said that there is a sense of unity compared to pure outsourcing, even though they are separate companies.

ODC Flow

The flow of ODC is explained in the image below:

Selection of the ODC Company

First, having a trustworthy ODC partner can mitigate the risk of wasting time and resources.

To find a reliable partner, let’s check out the methods below

• Consider a reference from acquaintances
• Attend seminars and webinars
• Search on the Internet
• Utilize matching sites

And so on.

Reripa has successfully served numerous clients through its specialized ODC services for Japanese companies. We are committed to providing cost-effective and fast development solutions, and we encourage you to contact us for a free consultation.

If you are new to ODC, it is recommended to seek a referral from a trusted source to ensure a safer and potentially more cost-effective experience. If referrals are not available, it is essential to consider factors beyond budget, such as the level of Japanese language proficiency, whether the company’s expertise matches the development requirements, and the availability of interpreters and designers, in addition to bridge SEs and engineers.

Preparation of Specifications

In parallel with the selection of ODC companies, clients need to create requirement documents. There are some crucial points that clients should pay attention to.

• What
• Why
• When
• How much

Clients need to thoroughly discuss and ponder whether they want to develop it. In terms of ODC, there may be cases where the specifications are not clarified, like in the Fixed Cost Contract. When doing so, don’t forget to clarify issues such as what is unclear and where the reasons and causes are.

Having clear and detailed specifications or required documents is essential for effective communication with ODC companies. When both parties share the same understanding and work towards the same goal, the success rate of the project is likely to increase. Therefore, it is crucial to put maximum effort into creating detailed specifications. When there are no contradictions in mutual understanding, it becomes easier to maintain the same pace and achieve the desired outcome.

When creating specifications for an ODC project, it is recommended to include, at a minimum, the following elements: a screen transition diagram, an image diagram, a sequence diagram, and a detailed explanation of the layout and operability. With these elements included, it becomes easier to have productive discussions with ODC companies.

However, it is important to note that it may be challenging to achieve 100% adoption of the specifications in the first stage. In some cases, compromises may need to be made, while in others, the performance may exceed expectations. The contractor’s resources and skills may also vary, and there may be situations that require adjusting the budget. Flexibility is key to ensuring a successful outcome.

Development Implementation

Once the specifications or required documents have been finalized, it is important to work collaboratively with the ODC partner to ensure that the development process is aligned with the specifications. However, it is crucial for clients to take the lead and not solely rely on the ODC company to drive the project. It is recommended to have daily meetings with key members at the initial stage to track progress and prevent deviations from the project plan. As the project progresses, it may be beneficial to have meetings every few days a week. However, it is important to note that specifications may change during the development process, and clients should provide detailed and specific instructions when requesting changes. Regular checks should also be carried out to ensure that the changes have been implemented correctly.

Test/Fix

Once the system is implemented, the ODC company will move on to the testing stage. If the programs run into any bugs at this stage, or the image doesn’t work as expected, ODC company will fix it right away. If the client can’t examine and validate the final delivered product within the contract period, the team will be disbanded, so it will be difficult to make any subsequent revisions. Even if clients want to fix it, they need to renew the contract and pay additional costs. Hence, it is recommended that clients finish the desired phase within the period.

Tips for a Successful Project with ODC

Let’s divide the tips for successful projects using ODC services into two categories: “risks to avoid” and “points to consider”.

Risks to Avoid When Using ODC

“Keep responsibilities clear”

At the beginning stage of the project, it is necessary to clarify the scope of responsibility of both the client and the ODC company.

It is advisable to define in detail and reach a consensus on aspects such as the party responsible for design and implementation, the scope of testing, team members involved, cost-sharing in case of any unexpected project-related expenses, and the post-development support system. It is recommended to document these details and have all parties agree upon them to avoid any confusion or misunderstandings during the development process.

“Don’t focus too much on cost”

Be careful not to fixate on cost and decide to outsource only because the quote is cheap. If the price is too low, there is a possibility that the engineer’s skills are low or the development track record is low. With ODC, there are cases where development stops halfway, and the relationship fades out, resulting in a large loss in terms of cost. To prevent this from happening, consider factors other than cost and try to select a partner from a comprehensive perspective.

“I have limited proficiency in English”.

Limited proficiency in English can be a significant hindrance in ODC. It is crucial to ensure that at least one member of the team has achieved an IELTS score of 6.0 or higher and can communicate and understand effectively by conducting actual conversations with them.

“Losses due to time differences and events”

There is a possibility of incurring losses due to time differences and events. The time difference between the partner countries can sometimes exceed 3 hours, which can be an advantage for development. However, it should be noted that real-time information sharing, inquiries, and urgent instructions may not be possible due to the time difference. In addition, if the project has a short contract period or is urgent, there is a risk of delays in development if it coincides with a long holiday or event. Therefore, it is important to thoroughly research the calendar and business customs of the partner country to minimize the risk of losses.

Points to Consider When Using ODC

“Confirmation of development results”

It is crucial to verify whether the development objectives and outcomes of the ODC company align with the intended purpose. The IT industry constantly evolves, with user demands and system functionality changing. Thus, it is necessary to check if the products developed by the ODC company meet the required specifications and needs. For instance, developing AI technology requires not only programming skills but also the ability to collect and possess highly accurate data. Similarly, developing blockchain technology requires expertise beyond language proficiency and knowledge of rule-making. Therefore, it is advisable to have the ODC company present its previous deliverables to ensure they have the necessary skills and experience.

“Thorough reporting and establishing rules”

Cross-cultural differences and communication barriers can lead to strained relationships in ODC partnerships. To avoid this, it is crucial to have a strict task management system in place and encourage thorough reporting and communication to monitor progress closely. Simply asking for updates is not sufficient. It is important to specify details such as the date, time, and purpose of each meeting. It is also recommended to determine the best communication method for each situation, such as face-to-face video conferencing, chat, or email exchanges, and establish a regular meeting schedule. Sorting out these details according to the participating members and content can also help facilitate effective communication.

“Confirm whether a preliminary interview is possible”

It is highly recommended to conduct preliminary interviews with key personnel such as bridge SEs, engineers, and interpreters. This is because it is impossible to determine whether they can comprehend what you require and to gauge their personality and facial expressions unless you converse with them face-to-face. It is essential to avoid any regrets later on by directly contacting them prior to the commencement of development, to evaluate the overall compatibility and rapport in addition to their technical expertise.

Read more: What you can do with PHP and the 4 Steps of Development with an IT Outsourcing Company

Summary

ODC can be highly beneficial for the ordering party if it is utilized properly. The costs are generally low, skilled engineers can be secured, and there is an opportunity to accumulate valuable know-how. Additionally, development speed can be significantly increased. However, it is important to recognize that there can be significant differences between ODC companies in terms of communication, development achievements, work attitudes, and approaches to work. To ensure the success of the project, it is recommended to take the necessary measures outlined in the article.

At Relipa, we are committed to supporting the development of Japanese companies and have received positive feedback from numerous customers. If you are considering ODC, please do not hesitate to contact us.